2025 (11) TMI 822 - HC - Income Tax

Unsecured loan held genuine under s.68 as creditor identity, bank routing and repayments proved; additions deleted.

Delhi HC allowed the assessee's appeal, upholding CIT(A) and ITAT findings that an unsecured loan need not be treated as income under s.68. Court held the ... Unsecured loan received and interest paid on such loan - primary onus to prove - ‘source of the source’ - why the unsecured loan taken from Shashi Foods should not be considered as undisclosed income and added to income u/s 68? - Revenue as contended that a mere submission that a loan has been received through banking channels does not mean that it is genuine - ITAT deleted addition - HELD THAT:- Loan advanced was in the FY 2013-14, i.e., AY 2014-15. The identity of the creditor has been proved by documentary evidence and also through the statement of the Director of Shashi Foods recorded during the survey proceedings and also in reply to the notice u/s 133(6) of the Act. As established that Shashi Foods advanced the loan out of the funds credited in its bank account, proving the creditworthiness of the entity. Though the AO had held that Shashi Foods did not have the necessary funds in its bank account to provide the loan, the findings of the CIT(A) and the ITAT are at variance with the observation of the AO inasmuch as that the loan has been advanced from the bank account of Shashi Foods. In any case, the Revenue has not placed on record anything to show that in the AY 2014-15, the requisite funds to advance the loan were not available in the bank account of Shashi Foods. So, it follows, the genuineness of the loan was and the creditworthiness of Shashi Foods have been proved by establishing that: (i) The same was received through banking channels; (ii) the loan has been repaid in the next financial year between 2015-16; (iii) repayment of the loan is with interest. Though the Revenue has raised an argument that the purchases made by Shashi Foods from other third entities were not genuine, the same is immaterial insofar as the assessment proceedings of the respondent is concerned. The initial onus cast upon the respondent/ assessee to show the genuineness of the transaction having been duly discharged, the question as to whether the funds at the hands of Shashi Foods were obtained through genuine purchases or not cannot be gone into by the Revenue. This we say so, for the reason that once the assessee discharges its initial onus of proving the identity and creditworthiness of the creditor and also the genuineness of the transaction, it is not incumbent upon the assessee to prove the genuineness of the funds at the hands of its lender, i.e., the ‘source of the source’ of the funds. As the assessee has established the identity of the lender. Even the creditworthiness of the lender cannot be in question. The loan transaction having been effected through proper banking channels, i.e., through the bank accounts of the parties, there cannot be any cavil to the genuineness of the transaction. Present case relates to the AY 2014-15, prior to the amendment brought about by the Finance Act, 2022 requiring assessees to prove the ‘source of the source’ of funds credited as unsecured loans. As such, the contention that the genuineness of the funds of Shashi Foods needs to be examined is devoid of any merit. As a necessary corollary to our conclusion, the plea of Mr. Maratha that out of the 12 creditors of Shashi Foods, the identity of only 4 could be ascertained, would also be immaterial and irrelevant, as the same would relate to enquiring into the source of the source of the funds received by the assessee. We find that the ITAT, which we have already reproduced above, has concluded on the aforesaid lines. We are in agreement with the same. Assessment u/s 153A - ITAT erred in confirming the order of the CIT(A) in view of the judgment in Abhisar Buildwell [2023 (4) TMI 1056 - SUPREME COURT] in deleting addition - AO in his order has not made any reference to any incriminating material, based on which the additions were made. In any case, we have already held that the ITAT was justified in upholding the order of the CIT(A) on merits. As such, this submission would not come to the aid of the Revenue. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the addition under Section 68 of the Income Tax Act of Rs. 10,00,00,000 on account of an alleged bogus unsecured loan and disallowance of interest paid thereon was rightly made where the creditor confirmed the loan and payments were by banking channels. 2. Whether, in the circumstances of the case, the Assessing Officer could examine the 'source of the source' (i.e., genuineness of the lender's receipts/purchases) to displace the assessee's initial proof under Section 68, particularly in light of subsequent judicial pronouncements limiting such enquiries. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of addition under Section 68 for alleged bogus unsecured loan and disallowance of interest Legal framework: Section 68 treats unexplained credits where sums are found credited in the books and the assessee fails to satisfactorily explain the nature and source; the initial onus lies on the assessee to prove identity, genuineness and creditworthiness of the creditor and the transaction, failing which the credit may be taxed as income. Precedent treatment: The analysis relies on established trilogy of principles from earlier High Court decisions: (a) the assessee bears initial burden to show identity, genuineness and creditworthiness; (b) once initial onus is discharged by adducing corroborative documents (banking channel payments, creditor confirmation, financial statements), the burden shifts to Revenue; and (c) in assessment of unsecured loans prior to Finance Act, 2022, the assessee is not obliged to prove the 'source of the source.' Interpretation and reasoning: The Court examined documentary evidence (loan confirmation by the creditor in survey statement and in response to notice under Section 133(6); bank statements showing receipt and repayment with interest; audited financials and ITR of the creditor) and factual findings of lower authorities. The Tribunal and first appellate authority concluded that identity, creditworthiness and genuineness were established by: (i) loan effected through banking channels; (ii) creditor's confirmation recorded during survey and under Section 133(6); and (iii) repayment with interest in the subsequent financial year. The AO relied on investigatory material suggesting the creditor procured bogus purchase bills and that many trade creditors could not be located; the AO treated this as casting doubt on the creditor's ability to fund the loan. The Court held that such enquiries, absent firm contrary material rebutting the creditor's confirmations and documentary proof of bank credits, did not suffice to impeach the assessee's initial proof. Ratio vs. Obiter: Ratio - where the assessee proves identity, genuineness and creditworthiness of the creditor by documentary evidence including banking channel transactions and creditor confirmations, the addition under Section 68 cannot be sustained unless Revenue brings contrary material to rebut the proof; the assessee is not required, pre-Finance Act 2022, to prove the lender's own source of funds. Obiter - observations on the immateriality of enquiries into the creditor's purchases in the assessee's assessment proceedings (but consistent with precedent). Conclusions: The Court affirmed the deletion of the Rs. 10,00,00,000 addition and related interest disallowance because the assessee discharged the initial onus under Section 68. The Tribunal and CIT(A)'s findings that the loan was routed by banking channels, confirmed by the creditor, and repaid with interest constituted sufficient proof. Revenue failed to bring convincing contrary material to rebut those findings; therefore the addition was not legally sustainable. Issue 2: Permissibility of examining 'source of the source' and applicability of subsequent amendments / relevant precedents Legal framework: Judicially developed rule that, in Section 68 proceedings, assessee must establish identity, genuineness and creditworthiness of creditor; but the requirement to prove the lender's source of funds (source of source) was introduced by statutory amendment (Finance Act, 2022) and is not applicable to assessment years prior to that amendment. Revenue's power to investigate remains, but scope is circumscribed by statutory and precedent constraints. Precedent treatment (followed/distinguished): The Court followed prior High Court and Supreme Court pronouncements holding that examination of 'source of the source' is not ordinarily permissible in the recipient's assessment pre-amendment, and that mere inability to locate some creditors at given addresses does not automatically vitiate the genuineness of credits where primary evidence exists (banking channel payments, creditor confirmations, documentary proof). Decisions cited establish that once assessee discharges initial onus, Revenue must produce contrary evidence to invoke Section 68; also that the assessee is not required to produce directors/representatives of creditor companies in all cases. Interpretation and reasoning: The AO's reliance on adverse enquiries in the creditor's assessment (missing creditors, allegedly bogus bills) was characterized as an attempt to impeach the lender's receipts and thereby to probe source of funds. The Court reasoned that such inquiry amounts to probing the creditor's internal affairs (source of source), which was impermissible for the recipient's assessment year under consideration and in light of established case-law. Further, the Court noted absence of any incriminating material actually relied upon by the AO to conclusively displace the creditor's confirmations and bank evidence. The timing gap between alleged transactions and spot inspections was also noted as weakening the AO's inference that missing creditors meant non-existence or fraud sufficient to deny Section 68 proof. Ratio vs. Obiter: Ratio - for assessment years preceding the 2022 amendment, Revenue cannot require the assessee to explain the lender's own source of funds once the assessee has established identity, genuineness and creditworthiness of the creditor by acceptable evidence; mere investigative observations regarding the creditor do not suffice to rebut such proof unless supported by contrary material. Obiter - comments on rotation of funds between groups and later-year transactions being irrelevant to the assessment year under consideration, as fact-specific determinations of later years cannot per se impeach an earlier year finding. Conclusions: The Court held that the AO erred in treating enquiries into the creditor's purchases/creditors as determinative for the assessee's Section 68 burden for the relevant assessment year. Given the assessee's documentary proof and creditor confirmations, and absence of cogent contrary material, Revenue could not sustain the addition by invoking source-of-source concerns. The statutory amendment post-dating the assessment year was held inapplicable. Cross-references / Interplay between issues 1. Issue 1 and Issue 2 are interlinked: Revenue's contention that Section 68 addition was justified hinged on probing the creditor's finances (Issue 2); the Court's resolution of Issue 2 (non-requirement to prove source-of-source pre-2022 amendment) substantially determined Issue 1 in favour of the assessee. 2. Findings of lower authorities that the creditor confirmed the loan and that transactions were by banking channels were decisive; Revenue's investigative material did not sufficiently rebut those specific proofs as required by the legal framework governing Section 68. Final outcome Both substantial questions of law were answered in favour of the assessee: the addition under Section 68 and related interest disallowance were not sustainable on the record for the assessment year in question, and the Assessing Officer's resort to 'source of the source' enquiries was impermissible for that assessment year and insufficient to rebut the assessee's proof.